LabCorp 2008 Annual Report Download - page 45

Notes to Consolidated Financial Statements
(Dollars and shares in millions, except per share data)
Laboratory Corporation of America
Laboratory Corporation of America® Holdings 2008 43
On September 15, 2008, Lehman Brothers Holdings, Inc. (“Lehman”), whose subsidiaries
have a $28.0 commitment in the Company’s Revolving Facility, filed for bankruptcy. Accordingly,
the Company does not expect Lehman will fulfill its pro rata share of any future borrowing requests
under the Revolving Facility. The Company is considering various options regarding this current
limitation on the Revolving Facility.
On March 31, 2008, the Company entered into a three-year interest rate swap agreement
to hedge variable interest rate risk on the Company’s variable interest rate term loan. Under
the swap the Company will, on a quarterly basis, pay a fixed rate of interest (2.92%) and receive
a variable rate of interest based on the three-month LIBOR rate on an amortizing notional
amount of indebtedness equivalent to the term loan balance outstanding. The swap has been
designated as a cash flow hedge. Accordingly, the Company recognizes the fair value of the swap
in the consolidated balance sheet and any changes in the fair value are recorded as adjustments
to accumulated other comprehensive income, net of tax. The fair value of the interest rate swap
agreement is the estimated amount that the Company would pay or receive to terminate the
swap agreement at the reporting date. The fair value of the swap was a liability of $13.5 at
December 31, 2008 and is included in other liabilities in the consolidated balance sheet. The
Company is exposed to credit-related losses in the event of nonperformance by the counterparty
to the swap agreement. Management does not expect the counterparty to fail to meet its obligation
given the strong creditworthiness of the counterparty to the agreement.
As of December 31, 2008, the interest rates on the Term Loan Facility and Revolving
Facility were 3.67% and 1.89%, respectively.
Zero-Coupon Convertible Subordinated Notes
In 2001, the Company sold $744.0 aggregate principal amount at maturity of its zero-coupon
convertible subordinated notes (the “notes”) due 2021. The notes, which are subordinate to
the Company’s bank debt, were sold at an issue price of $671.65 per $1,000 principal amount
at maturity (representing a yield to maturity of 2.0% per year). Each one thousand dollar principal
amount at maturity of the notes is convertible into 13.4108 shares of the Company’s common
stock, subject to adjustment in certain circumstances, if one of the following conditions occurs:
1) If the sales price of the Company’s common stock for at least 20 trading days in a
period of 30 consecutive trading days ending on the last trading day of the preceding
quarter reaches specified thresholds (beginning at 120% and declining 0.1282%
per quarter until it reaches approximately 110% for the quarter beginning July 1,
2021 of the accreted conversion price per share of common stock on the last day
of the preceding quarter). The accreted conversion price per share will equal the
issue price of a note plus the accrued original issue discount and any accrued
contingent additional principal, divided by the number of shares of common stock
issuable upon conversion of a note on that day. The conversion trigger price for the
fourth quarter of 2008 was approximately $67.16.
2) If the credit rating assigned to the notes by Standard & Poor’s Ratings Services is
at or below BB-.
3) If the notes are called for redemption.
4) If specified corporate transactions have occurred (such as if the Company is party to a
consolidation, merger or binding share exchange or a transfer of all or substantially
all of its assets).
On September 22, 2006, the Company announced that it had commenced an exchange
offer related to its zero-coupon subordinated notes due 2021. In the exchange offer, the
Company offered to exchange a new series of zero-coupon convertible subordinated notes due
September 11, 2021 (the “New Notes”) and an exchange fee of $2.50 per $1,000 aggregate
principal amount at maturity for all of the outstanding zero-coupon subordinated notes due
2021 (the “Old Notes”).
The purpose of the exchange offer was to exchange the Old Notes for the New Notes with
certain different terms, including the addition of a net share settlement feature. The net share
settlement feature requires the Company to satisfy its obligation due upon conversion to holders
of the New Notes in cash for a portion of the conversion obligation equal to the accreted princi-
pal of the New Notes and in shares for the remainder of the conversion value. In addition, the
New Notes provide that the Company eliminate its option to issue shares in lieu of paying cash
if and when the Company repurchases the New Notes at the option of holders.
On October 23, 2006, the exchange offer expired. Following settlement of the exchange,
$741.2 in aggregate principal amount at maturity of the New Notes and $2.6 in aggregate
principal amount at maturity of the Old Notes were outstanding.
Holders of the notes may require the Company to purchase in cash all or a portion of their
notes on September 11, 2011 at $819.54 per note, plus any accrued contingent additional
principal and any accrued contingent interest thereon.
The Company may redeem for cash all or a portion of the notes at any time on or after
September 11, 2006 at specified redemption prices per one thousand dollar principal amount
at maturity of the notes.
The Company has registered the notes and the shares of common stock issuable upon
conversion of the notes with the Securities and Exchange Commission.
On September 12, 2008, the Company announced that for the period of September 12,
2008 to March 11, 2009, the zero-coupon subordinated notes will accrue contingent cash interest
at a rate of no less than 0.125% of the average market price of a zero-coupon subordinated
note for the five trading days ended September 9, 2008, in addition to the continued accrual of
the original issue discount.
On October 1, 2008, the Company announced that its zero-coupon subordinated notes
could be converted into Common Stock at the conversion rate of 13.4108 per $1,000 principal
amount at maturity of the notes, subject to the terms of the zero-coupon subordinated notes
and the Indenture, dated as of September 11, 2001 between the Company and The Bank of
New York, as trustee and conversion agent. In order to exercise the option to convert all or a
portion of the zero-coupon subordinated notes, holders were required to validly surrender their
zero-coupon subordinated notes at any time during the calendar quarter beginning October 1,
2008, through the close of business on the last business day of the calendar quarter, which was
5:00 p.m., New York City time, on Wednesday, December 31, 2008. At December 31, 2008,
$5.7 of the $744 aggregate principal amount at maturity had been converted into cash of $2.6
and 0.035 shares of the Company’s common stock.
On January 6, 2009, the Company announced that because the common stock trading
price conversion feature of its zero-coupon subordinated notes was not triggered by fourth quarter
2008 trading prices, the zero-coupon subordinated notes may not be converted during the
period of January 1, 2009 through March 31, 2009 based on this conversion feature.